Mortgage Refinancing, What Exactly Does This Mean?

Mortgage refinancing plays a very important role for many home owners, particularly if they are struggling financially. It is a better alternative than falling prey to foreclosure, and if better interest rates can be negotiated, the home owner may find themselves in much better circumstance. Interests rates which increase as inflation increases are not a good option for most home owners.

With a refinance the underlying loan is repaid before the end of term and a new loan is taken out. There are a number of reasons for doing this and as we said, interest rates are a key factor. If a home loan is linked to an adjustable rates mortgage, or sub-prime mortgage it can become unaffordable, particularly if the economy is bad. Many of these loans were initiated when the economy was strong and now home owners are losing their property as they can no longer afford the re-payments.

A refinance is one of the ways a home owner is able to access the equity in their property. They may want to tap into it to get out of financial difficulty, or perhaps make a large purchase, say another property. This means is also used to consolidate all debt, so that the loan applicant only has to pay one lump sum monthly. There are benefits and as with everything else, also pitfalls, so it is important to be aware of this.

It can cost as much as 3-6% of the principal amount of the loan to refinance and this is an expensive consideration. Basically the methodology for a loan refinance is the same as taking out an original loan and all the same steps have to be taken. The property has to be appraised, a title search conducted, and application fees applied.

Home owners have to take all this into consideration when they are thinking of refinancing a mortgage. They have to ask themselves whether it is going to be of real and positive benefit.

The best possible reason why any home owner would want to refinance their home loan would be to negotiate a better interest rate. If you are able to reduce the amount of the interest on you present loan by 2%, it is generally believed to be worthwhile, although some lenders advocate that 1% is sufficient.

The premise behind lower interest rates is saving money! Your monthly payments should decrease quite substantially while still allowing you to build equity in the property. We illustrate how this can be done in this simple example:

This simple example illustrates how this may apply: You have a home loan for $100,000 and at 9% interest over a 30 year terms you pay, $804.62 per month. Reduce your interest rate by 3% to 6% and your monthly payments will be, $599.55, a substantial saving!

Dan Rogers has been in the real estate industry for more than 15 years. For more articles like this you should stop by his website which explains everything from me trying to explain refinancing a mortgage to mortgage loans first time home buyer no credit check.